Monday, September 29, 2008

What the Fed Should be Doing

Take a look at the 10 year chart for gold. You can see the inflation and the recent instability and deflation. The very last upswing took place when the 700 billion bailout was announced last week.

The dollar has been deflating recently. The Federal Reserve should stabilize the value of a dollar. Only recently it has become concerned with inflation because consumer prices are moving up.

But the Fed looking at the wrong number. Inflation has been happening for years, but its been happening mostly in housing, fuel prices and other commodities, while finished goods have been cheaper due to globalization.

The so-called core rate of inflation does not tell the complete story. It is not a leading indicator of inflation, but a trailing one.

It is not enough for the Fed to change interest rates based upon its feeling about the future direction of the economy. The Fed has got to change its strategy and work consistently to stabilize the dollar.

What the Fed is currently doing is like looking at how much water is entering the storm drains to predict hurricanes. It can't possibly work!